It's Vulture vs. Vulture as Icahn Circles Falcone

By

Matt Wirz

January 20, 2012

Philip Falcone, one of Wall Street's most prominent distressed-debt investors, has just received a dose of his own medicine from a veteran in the field, Carl Icahn.

Mr. Icahn has been quietly buying up debt of Mr. Falcone's wireless-network company LightSquared Inc., according to people familiar with the matter, swooping in after the debt plunged in value late last year amid regulatory delays.

ENLARGE

'Carl is certainly entitled to his opinion, as I am entitled to disagree with it.' —Philip Falcone
Reuters

The move could enable Mr. Icahn to have a say in the running of the troubled company, putting him on a collision course with Mr. Falcone.

The entrance of Mr. Icahn adds to a list of headaches for Mr. Falcone as he fights for regulatory approvals that would let LightSquared set up service. LightSquared said Wednesday that it has only enough cash to last the next few quarters.

Investors have been betting that LightSquared may run out of cash before it gets service running. Loans of LightSquared, which trade on the market like securities, tumbled from 100 cents on the dollar in June to about 40 cents on the dollar in December. One loan owner, Farallon Capital Management LLC, sold $300 million of loans in December, some of which were snapped up by Mr. Icahn. The rest were bought by David Tepper and Andrew Beal, also two veteran distressed investors.

Mr. Icahn is well known for rocking corporate boardrooms. One tool he has used is to buy up cheap stock and debt of companies he believes may be headed to bankruptcy court, such as Trans World Airlines, Marvel Entertainment Group and, more recently, Trump Entertainment Resorts. When they do file, he uses his investments to take control of the business. It isn't clear whether Mr. Icahn is following a similar strategy with LightSquared, and Mr. Icahn declined to comment.

ENLARGE

'I have shaken up … many companies.…Generally … the net result has been very positive.' —Carl Icahn
Bloomberg News

When asked about Mr. Icahn's investment via email, Mr. Falcone said: "Carl is certainly entitled to his opinion, as I am entitled to disagree with it."

Many of Mr. Icahn's contemporaries from the 1980s and 1990s— Ira Rennert, Charles Hurwitz and Ivan Boesky, among others—have since hung up their corporate-raider spurs. But the 75-year-old Mr. Icahn remains an active trader in the distressed-debt market.

Over the years, "the field has expanded in the world of distressed investing," said Edward Altman, a professor at New York University's Stern School of Business who specializes in distressed investing. "But Icahn has practiced it longer and more successfully than most."

Mr. Falcone started out as a distressed investor himself early last decade, buying up bonds and loans of troubled companies like Warren, Ohio-based WCI Steel Inc. and converting the debt to equity stakes through bankruptcy. But in 2007 he began to change tactics with a successful bet against subprime mortgages.

More recently he has been focused on LightSquared, and has plowed $2.9 billion of assets into the company from his hedge-fund firm, Harbinger Capital Partners LLC, sparking consternation among some of his own investors. LightSquared also borrowed $1.6 billion in loans to help fund the construction of its fourth-generation network.

But the company has been dealt a series of setbacks in its effort to win regulatory approval for the fourth-generation broadband network, which it says could serve 260 million Americans by 2016.

Mr. Falcone has received a temporary waiver to a requirement that LightSquared's network be used only for satellite phones, but he is now battling opponents who say the network interferes with global-positioning-system, or GPS, technology.

That has led to a delay in receiving a ruling from the Federal Communications Commission on whether LightSquared can operate the network. That delay has sparked worries that Mr. Falcone may lose a deal struck with Sprint Nextel Corp.S-1.75% The 15-year deal is reliant on LightSquared winning the FCC's blessing. LightSquared has said the Sprint deal will help it save $13 billion through the end of this decade.

That Messrs. Icahn, Tepper and Beal stepped into LightSquared is a sign that they believe there is some value in the company, investors said.

Should the company be forced to file for bankruptcy protection, those investors would likely be able to push to either sell the company's assets or seek to take control of the company.

"The fact that smart money from the likes of David Tepper and Carl Icahn is coming in speaks to the potential value of underlying assets," said Lance Vitanza, senior telecom analyst at brokerage CRT Capital Group. "If you were to resolve the GPS interference issues and eliminate the satellite requirement entirely you would have in excess of $10 billion in value."

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.